2010 End Indicates Tide Shift for Mutual Funds

January 12, 2011 (PLANSPONSOR.com) - Demand among U.S. investors for stock mutual funds accelerated by year end, with aggregate inflows to equity funds, including ETFs, near $25 billion during December, according to Strategic Insight (SI) , an Asset International company.

After attracting $1 trillion globally since the beginning of 2009, December marked a turning point – albeit temporary, SI said – for bond funds. In contrast to stock funds, rising interest rates, NAV declines, and year-end rebalancing triggered a spike of bond fund redemptions. December witnessed an estimated $26 billion of net outflows among all bond funds (including ETFs), the largest dollar amount since the peak of the financial crisis on October 2008. Nevertheless, global bond funds, floating rate funds, and high yield funds were a few investment areas with positive inflows.   

“Because many investors engage in year-end portfolio adjustments and tax-related moves, December is a difficult month from which to draw firm conclusions. However, it is clear that stock investor sentiment is slowly improving,” said Avi Nachmany, SI’s Director of Research, in a press release.  

Not including ETFs, international and global funds in December garnered net inflows of $14 billion, while domestic equity mutual funds saw net outflows of $9.5 billion. December was the seventh straight month that international and global equity funds saw positive flows.  

December’s bond-fund outflows included roughly $10 billion in outflows from taxable bond funds, although global bond funds saw net inflows in December due to investors’ increasing interest in global diversification. Also, high-yield bond funds saw inflows in December, which was a sign of an increasing appetite for risk among some investors – and in many ways an extension of improving equity sentiment. Muni bond funds saw net outflows of $13 billion in December, driven by a flood of supply (spurred by Build America Bonds) and worries about state and municipal government balance sheets.  

For the full-year 2010, long-term mutual funds attracted net inflows of $245 billion (not counting additional inflows to ETF and VA funds). That included $222 billion in net inflows to bond mutual funds – the second-largest flow numbers to bond funds ever, after 2009’s record inflows of $350 billion – and $23 billion in net inflows to equity funds, up from $14 billion in 2009 inflows to equity funds, the press release said.  

Money-market funds saw net outflows of $6.5 billion in December, a decline from the $25.1 billion in net inflows they saw in November.